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Indian Institute of Insolvency Professionals of ICAI (IIIPI), a frontline regulator of Insolvency and Bankruptcy Code (IBC), has developed a framework for handling ‘avoidance transactions’ during insolvency proceedings.
This framework, which has been suggested by a Study Group set by IIIPI, is based on analysis of 787 applications for avoidance transactions.
Under IBC, avoidance transactions are recognised as undervalued, fraudulent or extortionate by the previous promoters.
Put simply, whenever an entity becomes insolvent, there are certain transactions that are to be avoided under IBC. If such transactions —Preferential, Undervalued, Fraudulent and Extortionate (PUFE)—are included, it would affect the financial position of the entity and that’s why these transactions are called ‘avoidable transactions’.
The framework suggested by the IIIPI provides guidance to Insolvency Professionals (IPs) for aspects to be considered while identifying and examining PUFE transactions, determining the amounts involved and based on that coming to the conclusions and forming opinion.
“The guidance in this document is based on best practices, nationally and internationally. We hope that this report will help the IPs to tackle challenges faced while dealing with PUFE transactions effectively within the scope of the IBC avoiding delays or sub-optimal outcomes of avoidance transactions”, Ashok Haldia, Chairman, IIIPI’s Governing Board, said.
IIIPI also proposes to develop a template of forensic/ transaction audit for avoidance transactions that have taken place over the look back period.
The IBC requires the IP to find out any undue transaction before the commencement of the insolvency process and file application before NCLT to clawback undue gains from wrongful beneficiaries.
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The Avoidance Transactions include preferential payments, embezzling receipts, siphoning physical assets, causing an entity to pay for goods and services not received by the corporate debtors (payments to fictious vendors, inflated billing, fictious employees’ cost, etc.).
The idea of avoidable transactions has been around for a long time. This concept is already enshrined in the Companies Act 1956 and Companies Act 2013.
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